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‘Swaps market shouldn’t exist the way it is’: Heritage Capital Pres.

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Paul Schatz, Heritage Capital President, joins Yahoo Finance’s Alexis Christoforous and Kristin Myers to discuss the hit taken by media companies amid Archegos fallout.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, let's stick with the markets now and bring in Paul Schatz. He is President of Heritage Capital. Paul, thanks for kicking off the week with us. Before we get into the broader market, just want your take on what we're seeing with this hedge fund unwinding its position, seemingly liquidating and causing big drops in certain stocks.

Today, it appears to be the banks. Last week, it was some of the media holdings like Viacom, CBS, and-- and some of the others, and Discovery. What's your take on this? And how widespread might it be?

PAUL SCHATZ: Always good to be with you. My take is I'm not-- no one can be surprised, because we've had epic greed and euphoria in the markets, really since the end of October. What happens when you have this kind of behavior? People make egregious mistakes.

Look, well, in-- you know, in the Bush era, in 2005-ish on, the SEC allowed five investment banks to leverage 40 to 1. In 1998, you had long-term capital which was arguably 100 to 1. So when people get really confident and hubris takes over, and they-- they go overboard, they go beyond irresponsible behavior, what happens now is this is-- forces people to lose confidence in the markets. It forces, clearly, the regulators to get involved, as-- as they should, frankly.

This is yet another, I think it's a private fund, family office hedge fund, but I don't think it's regulated. And it appears through what's been reported that you've got an individual who was skirting the rules through using essentially non-disclosed, undisclosed secret derivatives called swaps, where you can't figure out what someone's open position is. So once again, we're going to probably hear from the politicians, like we did with GameStop, that this can't go on. It's rigged. It's not fair. And the problem is you get the few bad apples really painting a horrible picture of what goes on when people manage money.

KRISTIN MYERS: Paul, I'm really glad you mentioned the politicians because, of course, we all witnessed a lot of those really long hearings after GameStop, with Congress vowing to get involved on some regulatory level. What kind of regulation do you think might be coming down the pike, if any, if there is an appetite to go forward with that regulation because of the downsides and the ripples that we're seeing from some of these risky investment moves?

PAUL SCHATZ: Well, one, I'm anything but a lawyer or regulator. But I would say this. The playing field needs to be level. And as someone who manages money professionally, I'm all for it. You know, with GameStop, the problem was that you had people who own stock disclose when they own 5%. When people short stocks, there's no disclosure. That's an easy one to fix.

In this case, you know, the swaps market's always been this huge moneymaker for Wall Street. And it's when people-- when you have a position, it can be levered and levered and levered and each prime broker, like JP Morgan and Goldman Sachs, insert name here, doesn't know what the other one's doing, and it can become this ginormous pile of leverage that only takes the slightest little prick-- to mix metaphors-- to cause problems to happen. And if you look at Discovery, and Viacom, and Game-- and-- and Tencent, last week you saw, literally, just like a waterfall collapse. It looks like an elevator shaft.

So there are clearly these large funds that have very little disclosure requirements, like this, certainly need to have more disclosure in the swaps market. That's the-- the swaps market, frankly, is the wild West. And I'm sure I'll get a lot of hate mail from friends and old colleagues on the Street, but the swaps market should not exist the way it is. It fully should be brought on exchange. There should be better disclosure. And there should be better protection for investors.

ALEXIS CHRISTOFOROUS: So Paul, what do you do with those stocks that took a drubbing because of, you know, the mishandling of this hedge fund? What do you do with the bank stocks? What you do with some of those media stocks that have taken big, big hits? Is this a buying opportunity?

PAUL SCHATZ: Well, for full disclosure, banks and financials are among our largest positions. I don't think the decline was big enough for me to say, whoa, let's go buy some more. I think at its worst, maybe the banks and financials were down a percent, a percent and a half. That's not even a rounding error on what has been a leadership group since the October 30 low.

Regarding Tencent, we sold Tencent earlier this year when I saw it begin to unravel. I said last week to someone, boy, this looks like something's going on with a forced liquidation. And when you see those waterfall declines on surging volume, if you're an investor, you're-- my opinion is your best move is to wait.

Don't-- don't try to step in there too early. Let the stocks stabilize, at least for a day or two. But I do think a company like Discovery and Viacom and Tencent, even though you've removed that 800-pound gorilla of a buyer, I do think those companies will eventually regain themselves and probably test their old highs sooner than later over maybe next--

ALEXIS CHRISTOFOROUS: Hey, Paul.

PAUL SCHATZ: --quarter or two.

ALEXIS CHRISTOFOROUS: Hey, Paul. Just want to ask you real quick on the broader market, are you part of the herd that-- that's moving out of growth and into value? Are you still doing that?

PAUL SCHATZ: I think the time to do that, frankly, was last year. So people debating it right now, I mean, I think you're halfway through the theme for the year. My theme was growth over value, anything cyclical for the first six to eight months. Well, you're halfway through it.

If we do get a pretty good rally in growth, sure, then I would say take-- move some chips from growth into other areas. But to do it now when energy, financials, materials, industrials have all gone strongly higher to all-time highs and the growth component has fallen by the wayside, I wouldn't do it down here. No, I'd wait for a rally. But I think, again, you're halfway through this theme of the year, anyway.

ALEXIS CHRISTOFOROUS: All right, Paul Schatz, President of Heritage Capital. Good to see you.